As Starbucks Adopts 'Square' Payments, Will Other Merchants Follow?

You could soon pay for a latte at Starbucks simply by walking into the store with a smartphone in your pocket and giving the cashier your name.

Square, a San Francisco-based payments startup unveiled a deal Wednesday with the world's largest coffee chain that will move its mobile payments products into Starbucks stores around the U.S. starting this fall.

The deal is particularly interesting because until now Starbucks actually operated the most widely used mobile payments app in the world.

By encouraging its customers to load money onto their Starbucks cards or their mobile phone app in large chunks, Starbucks is able to cut down on the transaction fees credit card companies normally charge. These fees are tiny on big purchases like airplane tickets or cars but take a proportionally bigger bite out of small transactions like a latte. So controlling transaction costs is key to preserving Starbucks' profit margin.

It's unclear if Square agreed to lower its typical 2.75 percent transaction fee in order to secure Starbucks' business — neither company commented on that issue this morning. But this deal is a coup for Square.

Google, PayPal, AT&T and Verizon, not to mention Visa and MasterCard, have all been exploring technologies that could move your wallet into the digital world. But Square, founded by Twitter's co-founder Jack Dorsey, has consistently generated the most buzz and momentum in the space.

Square began by offering small merchants a square fob that allowed them to process credit card payments easily and cheaply with a smartphone. Then less than a year ago it introduced a consumer- oriented mobile payment app that used GPS to allow participating merchants to know when you walked into their stores. Your picture would pop up on their registers and at checkout you could pay with your name.

The app's been a hit with reviewers but Square has struggled to gain consumers' attention. Right now the app is accepted at smaller businesses and very few large national chains. The deal with Starbucks will change that. Starbucks is investing $25 million in Square and Starbucks CEO Howard Schultz will take a seat on Square's board of directors.

Schultz said in a company statement that Square could help smaller merchants and give entrepreneurs a tool to "jump-start their business." And analysts say the Starbucks deal may nudge other businesses to jump on the mobile payments bandwagon.

"Anyone who's going to break the mobile payments barrier in the U.S. has to overcome the resistance to try anything new when everything we have works really, really well, even cash, which is very convenient," said Bill Maurer, director of the Institute for Money, Technology and Financial Inclusion at the University of California, Irvine.

"But if a big merchant jumping into some mobile payment solution signals to other merchants that there is an opportunity here," he added, "that might change the psychology for other merchants."

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